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What Is a Bitcoin?

By Nick Westendorf
Senior Developer

April 23, 2014

“Bitcoin is a virtual currency used for buying, selling and trading. A single bitcoin is a digital string of numbers and letters. Individual computers in a collection of computers (the bitcoin network) each keep a registry of who owns which bitcoin, ensuring bitcoins cannot easily be copied or forged, and thus ensuring their value.”

Hi. My name is Nick and I’m a bitcoin addict (wait for the collective “Hi Nick”). It’s been 2 days since I last checked the price of a bitcoin, a personal best! I belong to a pool called Bitminter and run around 60 gh/s, pulling down maybe 0.1 bitcoins every few weeks. Annnnnd… I’ve lost the crowd.

So let me back up a bit. There’s been a lot of talk about bitcoins lately. I’m well aware and quite versed on the strange Internet currency that is only now creeping up into the main stream. You see – I also moonlight as a bitcoin prospector.

“Bwhauu…?” you say – “what is a bitcoin?” Okay, in literal terms a bitcoin is just a very long string of characters. However, there is also a peer-to-peer network of computers that keep a registry of who owns which bitcoin. The registry cannot easily be modified because a copy of it is on each computer on the network. Thus, because the registry says Jane Smith has bitcoin XYZ, it’s very hard to change it without somehow accessing every computer on the network. So even though a bitcoin is virtual, because of its simultaneous uniqueness, it can have value.

Which they do. As of writing this, bitcoins are trading at around $560-600 US dollars. Which is not only a big deal because they’re just strings of characters; it’s also kind of a big deal because a year ago, they were only worth pennies.

So now you might be wondering how you get a bitcoin and how do you transfer a bitcoin? Well, at its initial inception, a handful of bitcoins were simply handed out for free. When one user wants to transfer a bitcoin to another user, it’s done over the peer-to-peer network and the registry of each user is updated. In order to make this transfer secure, everything is encrypted. Early on in the days of the bitcoin network, a user’s CPU (the heart of a computer) processing power could be used to decrypt the exchange. For various reasons put in place to protect the health of the network, the difficulty of the encryption has gone up over time, so eventually CPUs just weren’t up to the task anymore.

In order to get a leg up and increase the chance of a payment, people started using more and more powerful computers to decrypt. Then, people began using graphics processing cards (GPUs). In response, the network increased the difficulty. In response, people built custom chips designed solely for decrypting. In response, the networked increased the difficulty. This continues on to this day – creating an arms race of processing power.

“But wait,” you might ask, “What do you mean ‘increase the chance of a payment’?” The other piece of this is that bitcoins are randomly rewarded to individuals who help in the decryption process. Otherwise, the network would never grow, as there would be no incentive to help. Remember – the whole point of decryption is to help transfer a bitcoin from one computer to another.

So let’s recap: A bitcoin is a string of characters; you receive bitcoins either by 1.) A transfer across the network, 2.) A random small payment for helping a transfer; it’s secure because everyone on the network has a registry of who owns which bitcoin; they have value because they’re unique and hard to obtain.

All that said – there are still some questions. Why create them? Who created them? Who owns the network? Why has the price gone up? Aren’t bitcoins for buying drugs? What does the government think of all this? Why are you subjugating me to this blog?!

Man, you have endless questions and I don’t have endless time! *Deep breath*

I don’t really know why they were created – I suppose the person who conceived of the idea thought it would be nice to have an open-source currency.

The person largely credited with creating bitcoins is a guy named Satoshi Nakamoto, based on an article written by someone named Wei Dai in the late 90s.

A core collective of developers now maintains the software and protocol, although no one person really owns it.

Bitcoins are gaining value due to speculators and to a lesser extent, demand. It’s exactly the same as the stock market. Someone speculates that one day, all kinds of retailers will accept bitcoins (currently, Overstock.com, gyft.com and a number of other online retailers are accepting them). Which would mean they have value beyond a few pennies. So speculators buy them. Demand goes up, and therefore the price goes up.

They do have that notoriety, yes. They are hard to trace, which makes them ideal for shady purposes. But not impossible. With awareness of bitcoins on the rise, that use seems to be declining.

Some governments out-right refuse to recognize bitcoins and ban their use and trade. The US government, very recently, declared that bitcoins are property. Which is good, in that various property protection laws can now protect them. But this has some consequences – I’m sure they’ll work on regulating them, taxing them, or so forth. It’s also a unique distinction from “currency”. What that distinction means, I don’t know… I’m no expert on US law.

So that just leaves the last question. Why are you reading this? Why did I write it? Because surprising developments happen on a regular basis. A year from now, you might wake up to find the whole of the United States now accepts US dollars and some strange abstract thing called a bitcoin. It’s not as far-fetched as you might think – go to a border city in Canada and you may be surprised to find they gladly accept your US dollars. Or, hey, the whole thing might collapse overnight and the word ‘bitcoin’ may be nothing more than a dusty Wikipedia entry.

Truth be told, virtual currencies are already here to stay, even if bitcoins don’t survive. Reward cards? Amazon points? World of Warcraft gold? Virtual currency. Honestly, even US dollars. You really think all those numbers in all those bank accounts add up to the amount of printed money in circulation? As if. Our whole economy is already virtual.

In short, it’s a strange and wondrous world, and everyone should be aware of what’s going on in it.